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Why Is It Essential to Consider Tax Planning

· taxplanning

Taxes can take out a huge amount from your total investment returns so it is essential that you consider strategies that are tax-advantaged while building your portfolio. You should not be required to pay more in tax than you deserve. This requires you to take advantage of different strategies, credits and deductions that you are entitled to and also adhere to tax planning strategies.

Tax-deferred and tax-free investments

Tax deferral is the process in which you delay the payment of taxes on your income you earn in the current year. For instance, the money you put in your retirement account is not taxed until you draw it, which can be 30 or 40 years later. The earnings generated by the account will also be tax-free. This is advantageous as the money you might have spent on taxes stays invested and for your own benefit. In the initial years of investment, the advantage of compound growth is not that significant but as the years pass, the long-term boost up to your total returns can be phenomenal.

General rules for funding Roth IRAs

There are a total of three methods to fund a Roth IRA:

  • You can directly contribute in case you fall within the income limits
  • You can convert a part or all of a traditional IRA to a Roth IRA
  • You can move your funds from an eligible employer retirement plan into a Roth IRA

How to convert to a traditional IRA to Roth IRA

Before the year 2010, you could not convert a traditional IRA to a Roth IRA in case your modified gross income surpassed $100,000. Today, no matter how much you earn or what your filing status is, you can convert a traditional IRA to a Roth IRA. To do this, you just have to notify your existing traditional IRA custodian that you wish to convert a part or all of your traditional IRA to a Roth IRA and fill out the required paperwork.

Utilizing conversions to make annual contributions

In case you are presently boosting your retirement savings in a qualified plan with your employer and do not fall in the income limitation for Roth IRA contributions, you can consider making your contribution to a nondeductible Traditional IRA. You can then directly convert it to a Roth IRA. There aren’t any limits to the number of Roth conversions that you can make. But, in case you have other IRA accounts, it is important that you check with your advisor. Also, you can consider Tax planning services to save effectively on your taxes and make the most of your investments and savings.

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